A structured settlement is an annuity contract issued by an insurance company to fund the payment of damages for personal injury over time. It is sometimes referred to as an insurance settlement. It guarantees you or, in the event of your death, your beneficiary, a tax-free payment or a series of payments over time. Most structured settlements are the result of a lawsuit or an insurance claim.

Yes. You can sell your structured settlement or insurance settlement payments, even if your insurance company includes a nontransferable clause in the contract.

Most states have a Structured Settlement Protection Act. These laws allow you to sell your payments if the following requirements are met:

You must be given full disclosure about the financial terms of your sale.

You have a “cooling off period” after you sign documents to change your mind and cancel the sale.

You must be advised by the purchaser in writing to seek independent professional (legal) advice regarding your sale. In some states you can choose to waive the advice.

A hearing is held where a judge considers your case and decides whether to approve the sale. The judge will examine your financial situation, what you want to do with the money and whether it is in your best interests to sell payments.

What if your settlement agreement or annuity policy contains anti-sale or anti-assignment language?

Anti-assignment or anti-sale language does not prevent you from selling your payments. Some settlement agreements or annuity policies contain anti-sale or anti-assignment wording such as: “none of the periodic payments may be accelerated, deferred, increased or decreased and may not be anticipated, sold, assigned or encumbered.” Since you must get a court order approving the sale of your payments, a judge will review and evaluate your case. Judges have the power to approve the sale, even if there is language in your settlement agreement or structured settlement annuity policy that attempts to prevent you from selling your payments.

Can you sell just some of your structured settlement payments or do you have to sell them all?

You can sell some or all of you payments. If you only sell some of your payments your insurance company will continue to pay you the payments you still own when those payments are due. The payments you sold will be paid to the purchaser when they come due. That’s why the payment price represents a discount — because their value to you now is greater than their value to the purchaser when they come due. The purchaser will base his offer on what the value of the payments will be when he receives them.

What if you have sold some of your structured settlement payments in the past? Can you sell more now to a different purchaser?

Yes. If you have sold some of your structured settlement payments in the past you can sell any remaining payments to which you are still a payee. However, if the original purchaser request a right of first refusal and you agree to it, you must allow him to make you an offer before going to another purchaser.

Do you have to pay tax on the money you receive on the sale of your structured settlement payments?

The money you receive from selling your structured settlement payments will have the same tax treatment as the payments you receive from your structured settlement annuity. If you currently receive your payments tax-free, the money you receive from selling your payments will be tax-free. In most cases your structured settlement annuity payments are tax-free because your annuity was set up to qualify for tax-free treatment under section 130 of the Internal Revenue Code. Section 104(a)(2) of the Internal Revenue Code confirms that damages received for personal injury or sickness are not considered income and are not subject to tax. In 2002 federal legislation was passed to protect payees in the sale of their structured settlement payments. As a result, Section 5891 was added to the Internal Revenue Code. Section 5891 requires the sale of structured settlement payments must be approved by a court in accordance with the relevant State statute.

You do not give up any rights when selling a structured settlement until the transaction is completed and you are fully paid the selling price. Furthermore, your case is protected by the court, and a judge’s order requires the funding company to perform its obligations. You are fully protected. However, some structured settlement purchasers make better offers than others. It is wise to work with a broker who can advise you on which purchaser will offer you the best deal.

The law does not disallow it, but it is a difficult transaction to complete, as the insurance companies or the Workers’ Comp Board seem to object to it and the judges seem to rule with the objector. A claimant in bankruptcy seems the only way it can be done but only with the Workers’ Comp Board’s approval.